Page 35
TEN-YEAR REVIEW
(dollars in thousands, except per share amounts)
Summary of Operations 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
--------------------------------------------------------------------------------------------------
Net Sales $681,920 $557,335 $477,054 $364,825 $280,634 $225,860 $178,636 $148,095 $129,183 $108,377
Costs and expenses:
Cost of sales 300,381 256,748 221,650 172,477 132,882 106,899 85,037 71,420 64,090 54,029
Research,
development and
engineering 39,630 36,199 32,313 23,703 19,663 15,572 12,193 8,888 6,509 5,706
Selling, general
and admini-
strative 221,433 172,446 149,390 117,089 92,384 71,761 55,046 45,776 39,946 33,778
--------------------------------------------------------------------------------------------------
561,444 465,393 403,353 313,269 244,929 194,232 152,276 126,084 110,545 93,513
--------------------------------------------------------------------------------------------------
Operating Income 120,476 91,942 73,701 51,556 35,705 31,628 26,360 22,011 18,638 14,864
Other income
(expense) 7,099 4,123 3,239 1,789 2,395 (598) (360) 14 77 473
--------------------------------------------------------------------------------------------------
Earnings Before
Income Taxes,
Minority
Interest and
Extraordinary
Item 127,575 96,065 76,940 53,345 38,100 31,030 26,000 22,025 18,715 15,337
Income taxes 50,770 35,860 29,240 20,270 14,475 11,800 10,140 9,300 8,502 6,770
Minority interest (4,405)
--------------------------------------------------------------------------------------------------
Earnings Before
Extraordinary Item 72,400 60,205 47,700 33,075 23,625 19,230 15,860 12,725 10,213 8,567
Extraordinary gain
(net) 9,910
--------------------------------------------------------------------------------------------------
Net Earnings $72,400 $60,205 $47,700 $33,075 $33,535 $19,230 $15,860 $12,725 $10,213 $8,567
==================================================================================================
Earnings Per Share
of Common Stock: (a)<F1>
Before extra-
ordinary item $1.50 $1.25 $1.00 $.70 $.50 $.41 $.34 $.27 $.22 $.19
Extraordinary gain $.21
Net Earnings $1.50 $1.25 $1.00 $.70 $.71 $.41 $.34 $.27 $.22 $.19
Dividend Per Share of
Common Stock $.08 $.07 $.06 $.05
Average Number of
Shares Outstanding
- in thousands(a)<F1>48,367 48,356 47,716 47,526 47,396 47,178 46,864 46,734 46,410 46,146
<FN>
<F1>(a) Adjusted for the three-for-two stock splits effective August 16, 1985 and May 19, 1989;
and the two-for-one stock splits effective May 11, 1987 and May 13, 1991.
</FN>
Page 36
FINANCIAL AND STATISTICAL DATA
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
-------------------------------------------------------------------------------------------------
Cash and Marketable
Securities 202,045 152,637 91,752 80,029 54,052 19,282 4,602 5,999 8,390 12,163
Working Capital 361,318 213,965 168,197 140,296 117,877 89,594 70,071 56,399 43,538 37,970
Current Ratio 3.0 2.6 2.7 2.6 3.0 3.5 3.4 3.3 2.9 3.0
Property, Plant and
Equipment - Net 180,719 67,707 59,649 36,056 28,700 22,918 20,703 17,658 17,018 14,689
Capital Expenditures 29,239 20,160 31,618 16,570 11,935 7,106 7,987 3,895 5,377 6,818
Depreciation and
Amortization 20,944 16,183 11,382 11,796 7,109 6,312 5,999 5,402 3,860 3,068
Total Assets 767,971 454,204 340,272 270,316 209,521 152,333 124,830 104,965 89,323 73,448
Long-Term Debt 95,276 31,282 1,433 1,400 1,900 2,655 3,121 3,704 3,951 4,242
Stockholders' Equity 358,266 288,434 232,261 179,875 147,875 112,029 91,019 75,216 60,455 49,131
Return on Average
Equity 22.4 23.1 23.1 20.2 18.2 18.9 19.1 18.8 18.6 19.2
Number of Stockholders
of Record 3,684 3,951 3,512 2,914 2,400 2,294 2,049 2,055 1,626 1,427
Number of Employees 4,221 3,228 2,906 2,448 1,913 1,599 1,408 1,180 1,073 948
Page 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The table below outlines the components of the consolidated statement of
earnings as a percentage of net sales:
Percentage of Net Sales Percentage Increase
-------------------------- -------------------
1994 1993 1992 1994/93 1993/92
------ ------ ------ ------- -------
Net Sales 100.0% 100.0% 100.0% 22% 17%
Cost of sales 44.0 46.1 46.5 17 16
Research, development
and engineering expense 5.8 6.5 6.8 9 12
Selling, general and
administrative expense 32.5 30.9 31.3 28 15
----- ----- -----
Operating Income 17.7 16.5 15.4 31 25
Other income 1.0 .7 .7
----- ----- -----
Earnings Before Income
Taxes and Minority
Interest 18.7 17.2 16.1 33 25
Income taxes 7.4 6.4 6.1 42 23
----- ----- -----
Earnings Before Minority
Interest 11.3 10.8 10.0 28 26
Minority interest (.7)
----- ----- -----
Net Earnings 10.6% 10.8% 10.0% 20 26
===== ===== =====
1994 Compared to 1993
- ---------------------
Stryker Corporation's net sales increased 22% in 1994 to $681.9 million
compared to $557.3 million in 1993. The purchase by Stryker of an additional
31% interest in its Japanese distributor, Matsumoto Medical Instruments, Inc.
(Matsumoto), and Matsumoto's resulting consolidation with Stryker beginning
in August 1994, accounted for 12% of the increase through incremental sales at
end customer selling prices of Stryker products and added sales of other
suppliers' products. Increased unit volume generated an 8% increase in sales,
other business acquisitions accounted for 3% of the overall increase and
increased selling prices provided an additional 2% increase. The Company also
converted certain portions of the Osteonics domestic distribution network to
direct sales, resulting in the repurchase of inventory from distributors,
which reduced net sales by 3%.
Uncertainty over the impact of U.S. health care reform programs generally
slowed domestic sales of medical devices during 1994. The Company's domestic
sales increased 7% in 1994 compared to 1993. International sales increased
54% in 1994. The international sales gains were led by incremental Japanese
sales from the consolidation of Matsumoto along with increased shipments of
Osteonics orthopaedic implants, Dimso spinal implants, powered surgical
instruments and hospital beds and stretchers. International sales grew to
41% of total sales in 1994 compared to 32% in 1993.
Page 38
Surgical product sales (principally orthopaedic products) increased 22% for
the year. The increase in domestic sales of Surgical products was led by
Stryker Instrument's SurgiLav Plus pulsed irrigation system and High Vacuum
Cement Injection System and Stryker Endoscopy's line of powered arthroscopic
instruments. The increase in international sales of Surgical products was led
by incremental sales from the consolidation of Matsumoto along with sales of
Osteonics' orthopaedic implants, Dimso spinal implants and powered surgical
instruments. Sales of Medical products (principally specialty stretchers/beds
and physical therapy services) increased 25%, led by increased revenues from
physical therapy services as a result of business acquisitions during the
year, increased sales of the MPS Primary Acute Care Bed, which was introduced
in the third quarter of 1993, and increased sales of patient handling equipment.
Cost of sales represented 44.0% of sales compared to 46.1% in 1993. The lower
cost of sales percentage in 1994 resulted from additional margins on Stryker
products sold by Matsumoto since its consolidation and improved margins from
ongoing cost reduction programs and the conversion of certain portions of
Osteonics' domestic distribution network which resulted in increased direct
sales to hospitals. Research, development and engineering expense increased
9% as the Company spent $39.6 million on product development in 1994 compared
to $36.2 million in 1993. The decrease in research, development and
engineering expense as a percentage of sales in 1994 is principally a result
of consolidating Matsumoto which, as a distributor, incurs minimal research
and development costs. The Company's continued commitment to product
development resulted in several new products in 1994, including the Omnifit
Plus forged cobalt chrome hip stem, the Sapphire ViewTM arthroscope system, a
new low cost high resolution 1-chip camera, a second generation ConstaVacTM
CBCII Blood Conservation System, and a new line of powered micro instruments
for oral/maxillofacial procedures. Selling, general and administrative
expenses increased 28% in 1994, principally as a result of consolidating
Matsumoto which, as a distributor, has a higher percentage of these expenses,
along with increased sales expenses resulting from the changes in Osteonics'
distribution network. These costs increased to 32.5% of sales in 1994
compared to 30.9% in 1993.
The effective tax rate increased to 39.8% in 1994 compared to 37.3% in 1993
as a result of the higher Japanese tax rate on the earnings of Matsumoto.
Earnings before minority interest increased 28% in 1994 compared to 1993. Net
earnings in 1994 were $72.4 million, a 20% increase over the Company's 1993
net earnings of $60.2 million.
In the fourth quarter of 1994 net sales reached a record level of $204.6
million. The consolidation of Matsumoto resulted in incremental net sales of
$40.2 million and incremental net earnings of $1.9 million ($.04 per share) in
the fourth quarter.
1993 Compared to 1992
- ---------------------
Stryker Corporation's net sales increased 17% in 1993 to $557.3 million as
demand for the Company's products, which are sold to hospitals throughout the
world, continued to grow. Increased unit volume accounted for the entire
increase as higher selling prices in 1993 provided only 1% growth and were
essentially offset by the effect of changes in foreign currency exchange
rates.
Uncertainty over the impact of U.S. health care reform programs has generally
slowed domestic sales of medical devices. In addition, in an effort to reduce
their costs, purchasers of the Company's orthopaedic implants domestically
have shifted their purchasing mix toward the Company's lower-cost implants.
Despite these factors, the Company's total domestic sales grew 14% in 1993.
International sales increased 22% in 1993 led by Osteonics orthopaedic implant
Page 39
and Dimso spinal implant sales. International sales expanded to 32% of total
sales in 1993 compared to 31% in 1992.
Surgical product sales increased 13% for the year. The domestic sales growth
in Surgical products was led by Stryker Instruments' High Vacuum Cement
Injection System and SurgiLav Plus pulsed irrigation system, Osteonics' knee
implants and Stryker Endoscopy's newly introduced third generation Model 782
3-Chip Camera. The international sales growth of Surgical products was led by
Osteonics orthopaedic implant sales by the Company's Pacific Division and
Dimso spinal implant system sales by all the Company's international
divisions. Sales of Medical products increased 33%, led by the introduction
of the MPS Primary Acute Care Bed in the third quarter, increased revenues
from physical therapy services and increased sales of patient handling
equipment.
Cost reduction programs at several of the Company's divisions and the higher
mix of international sales lowered the cost of sales percentage in 1993
compared to 1992. Research, development and engineering expense increased 12%
as the Company spent $36.2 million on product development in 1993 compared to
$32.3 million in 1992. This commitment to product development resulted in
several new products in 1993 including the MPS Primary Acute Care Bed, the
Quadracut ACL/Shaver System for arthroscopy, the SurgiLav Plus pulsed
irrigation system, and the Series 7000 Primary Posterially Stabilized Knee
and Modular Tibia System. Selling, general and administrative expense
increased 15% in 1993, principally as a result of larger sales forces in the
Company's Instruments and Medical Divisions. However, this cost increase was
contained below the percentage growth in sales and these costs dropped to 30.9%
of sales in 1993 compared to 31.3% in 1992.
The effective tax rate decreased to 37.3% in 1993 compared to 38.0% in 1992
due to lower effective foreign tax rates. Effective January 1, 1993, the
Company adopted FASB Statement No. 109, "Accounting for Income Taxes". The
cumulative effect of the change in the method of accounting on net earnings
was not material. Net earnings in 1993 were $60.2 million, a 26% increase
over the Company's earnings in 1992 of $47.7 million.
In the fourth quarter of 1993, net sales reached a record level of $145.2
million and net earnings were $17.8 million or 12.2% of sales. Fourth quarter
net earnings as a percent of sales was higher than the previous three quarters
of the year because manufacturing costs and operating expenses increased at a
slower rate than sales.
Liquidity and Capital Resources
- -------------------------------
Stryker's financial position continued to strengthen in 1994, with operating
activities providing $97.7 million in cash. Working capital increased to
$361.3 million from $214.0 million in the prior year. Accounts receivable
increased 76% and days sales outstanding at the end of 1994 increased to 67
days from 47 days at the end of 1993. The increases reflect the consolidation
of Matsumoto's accounts receivable which generally have longer collection terms.
Inventories increased 51% in 1994 and days sales in inventory finished 1994 at
131 days compared to 114 days at the end of 1993. These increases also reflect
the consolidation of Matsumoto which, as a distributor, carries higher
inventory levels.
In August 1994, the Company purchased 31% of the outstanding common stock of
Matsumoto, thereby increasing its direct ownership interest in Matsumoto to
51%. The cost of the 31% investment, which was based on net book value, was
approximately 6.0 billion Yen ($60.7 million). Payment of approximately 847
million Yen ($8.5 million) of the purchase price has been deferred to April
1995. The acquisition of the shares was funded with an unsecured Yen
Page 40
denominated four-year floating rate loan. The Company has fixed the effective
annual interest rate of this debt at 4.17% using an interest rate swap with a
notional amount and term equal to that of the related loan.
The Company's cash and marketable securities of $202.0 million at December 31,
1994, as well as anticipated cash flows from operations, are expected to be
sufficient to fund planned future operating capital requirements. Should
additional funds be required, the Company has unsecured lines of credit with
banks totaling $45.7 million. At December 31, 1994, only $.2 million of these
lines has been utilized to fund operating activities overseas.
Page 41
CONSOLIDATED BALANCE SHEET
STRYKER CORPORATION AND SUBSIDIARIES
December 31
(in thousands, except per share amounts) 1994 1993
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $116,781 $49,712
Marketable securities 85,264 102,925
Accounts receivable, less allowance of $6,400
($3,800 in 1993) 154,590 87,896
Inventories 115,757 76,582
Deferred income taxes 54,333 15,829
Prepaid expenses and other current assets 13,804 10,907
-------- --------
Total Current Assets 540,529 343,851
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements 131,320 30,790
Machinery and equipment 139,948 94,551
-------- --------
271,268 125,341
Less allowance for depreciation 90,549 57,634
-------- --------
180,719 67,707
OTHER ASSETS
Intangibles, less accumulated amortization of
$14,071 ($9,925 in 1993) 17,272 7,795
Investment in affiliate 32,569
Other 29,451 2,282
-------- --------
46,723 42,646
-------- --------
$767,971 $454,204
======== ========
Page 42
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $208 $777
Accounts payable 50,433 43,172
Accrued compensation 28,834 28,270
Income taxes 38,811 21,107
Accrued expenses and other liabilities 55,556 35,678
Current maturities of long-term debt 5,369 882
-------- --------
Total Current Liabilities 179,211 129,886
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES 95,276 31,282
OTHER LIABILITIES 35,245 4,602
MINORITY INTEREST 99,973
STOCKHOLDERS' EQUITY
Common stock, $.10 par value:
Authorized--150,000 shares
Outstanding--48,369 shares (48,395 in 1993) 4,837 4,840
Additional paid-in capital 15,796 17,111
Retained earnings 336,897 268,367
Unrealized losses on securities (1,315)
Foreign translation adjustments 2,051 (1,884)
-------- --------
Total Stockholders' Equity 358,266 288,434
-------- --------
$767,971 $454,204
======== ========
See accompanying notes to consolidated financial statements.
Page 43
CONSOLIDATED STATEMENT OF EARNINGS
STRYKER CORPORATION AND SUBSIDIARIES
Years Ended December 31
(in thousands, except per share amounts) 1994 1993 1992
-------- -------- --------
Net Sales $681,920 $557,335 $477,054
Costs and expenses:
Cost of sales 300,381 256,748 221,650
Research, development and engineering 39,630 36,199 32,313
Selling, general and administrative 221,433 172,446 149,390
-------- -------- --------
561,444 465,393 403,353
-------- -------- --------
Operating Income 120,476 91,942 73,701
Other income - net 7,099 4,123 3,239
-------- -------- --------
Earnings Before Income Taxes and
Minority Interest 127,575 96,065 76,940
Income taxes 50,770 35,860 29,240
-------- -------- --------
Earnings Before Minority Interest 76,805 60,205 47,700
Minority interest (4,405)
-------- -------- --------
Net Earnings $72,400 $60,205 $47,700
======== ======== ========
Net Earnings Per Share of Common Stock $1.50 $1.25 $1.00
===== ===== =====
Average Number of Shares Outstanding 48,367 48,356 47,716
====== ====== ======
See accompanying notes to consolidated financial statements.
Page 44
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
STRYKER CORPORATION AND SUBSIDIARIES
Additional Unrealized Foreign
Years Ended December 31 Common Paid-In Retained Gains(Losses) Translation
(in thousands, except per share amounts) Stock Capital Earnings on Securities Adjustments
------ ---------- -------- ------------- -----------
Balance at January 1, 1992 $4,760 $6,013 $166,748 $2,354
Net earnings for 1992 47,700
Sales of 706 shares of common stock
under stock option and benefit plans,
including $7,469 income tax benefit 70 9,719
Cash dividend declared of $.06 per
share of common stock (2,898)
Translation adjustment (2,205)
------ ------- -------- ------
Balance at December 31, 1992 4,830 15,732 211,550 149
Net earnings for 1993 60,205
Sales of 92 shares of common stock
under stock option and benefit plans,
including $393 income tax benefit 10 1,379
Cash dividend declared of $.07 per
share of common stock (3,388)
Translation adjustment (2,033)
------ ------- -------- ------
Balance at December 31, 1993 4,840 17,111 268,367 (1,884)
Net earnings for 1994 72,400
Sales of 96 shares of common stock
under stock option and benefit plans,
including $740 income tax benefit 9 1,782
Repurchases of 122 shares of common
stock (12) (3,097)
Cash dividend declared of $.08 per
share of common stock (3,870)
Adjustment to beginning balance for
change in accounting method, net of
income taxes of $751 $1,180
Unrealized losses, net of $1,636 income
tax benefit (2,495)
Translation adjustment 3,935
------ ------- -------- ------ ------
Balance at December 31, 1994 $4,837 $15,796 $336,897 ($1,315) $2,051
====== ======= ======== ====== ======
See accompanying notes to consolidated financial statements.
Page 45
CONSOLIDATED STATEMENT OF CASH FLOWS
STRYKER CORPORATION AND SUBSIDIARIES
Years Ended December 31 (in thousands) 1994 1993 1992
- -------------------------------------- -------- -------- --------
OPERATING ACTIVITIES
Net Earnings $72,400 $60,205 $47,700
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 18,717 13,048 10,214
Amortization 2,227 3,135 1,168
Minority interest 4,405
Provision for losses on accounts
receivable 2,600 900 400
Deferred income taxes (credit) (3,818) (2,917) (4,171)
Changes in operating assets and
liabilities, net of effects of
business acquisitions:
Decrease (increase) in accounts
receivable 2,862 (11,305) (20,563)
Decrease in inventories 5,798 2,271 726
Increase (decrease) in accounts
payable (8,594) 4,982 7,723
Increase (decrease) in income
taxes (3,898) 11,092 632
Other 4,994 4,691 6,899
-------- -------- --------
Net Cash Provided by Operating Activities 97,693 86,102 50,728
INVESTING ACTIVITIES
Purchases of property, plant and equipment (29,239) (20,160) (31,618)
Sales (purchases) of marketable securities 17,661 (54,264) (21,553)
Business acquisitions, net of cash acquired (42,557) (34,654) (8,736)
-------- -------- --------
Net Cash Used in Investing Activities (54,135) (109,078) (61,907)
FINANCING ACTIVITIES
Proceeds from borrowings 59,919 33,563
Payments on borrowings (31,771) (2,016) (7,418)
Dividends paid (3,388) (2,898) (2,380)
Proceeds from exercise of stock options 1,791 1,389 9,789
Repurchases of common stock (3,109)
Other (1,307) (126) (376)
-------- -------- --------
Net Cash Provided by (Used in)
Financing Activities 22,135 29,912 (385)
Effect of exchange rate changes on cash
and cash equivalents 1,376 (315) 1,734
-------- -------- --------
Increase (Decrease) in Cash and Cash
Equivalents 67,069 6,621 (9,830)
Cash and cash equivalents at beginning
of year 49,712 43,091 52,921
-------- -------- --------
Cash and Cash Equivalents at End of Year $116,781 $49,712 $43,091
======== ======== ========
See accompanying notes to consolidated financial statements.
Page 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STRYKER CORPORATION AND SUBSIDIARIES
December 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: Stryker Corporation develops, manufactures and markets specialty
surgical and medical products which are sold primarily to hospitals throughout
the world.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries and, effective in
August 1994 (see Note 4), its 51% owned subsidiary, Matsumoto Medical
Instruments, Inc., after elimination of all significant intercompany accounts
and transactions. Minority interest represents the minority stockholders'
equity in Matsumoto's net earnings since August 1994 and their equity in
Matsumoto's net assets at December 31, 1994. The Company's 20% investment in
Matsumoto during the period from August 1993 to July 1994 was accounted for
by the equity method.
REVENUE RECOGNITION: Revenue is recognized on the sale of products when the
related goods have been shipped or services have been rendered.
CASH EQUIVALENTS AND INVESTMENTS: Cash equivalents are highly liquid
investments with a maturity of three months or less when purchased.
Investments include marketable equity and debt securities classified as current
assets and certain noncurrent investments included in other assets.
The Company's investments in marketable equity and debt securities are
classified as "available-for-sale" and are carried at fair value, with the
unrealized gains and losses, net of income taxes, reported as a separate
component of stockholders' equity. Interest and dividends on these securities
are included in other income.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost for
approximately 75% (63% in 1993) of inventories is determined using the lower
of first-in, first-out (FIFO) cost or market. Cost for certain domestic
inventories is determined using the last-in, first-out (LIFO) cost method. The
FIFO cost for all inventories approximates replacement cost.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at
cost. Depreciation is computed by the straight-line or declining balance
methods over the estimated useful lives of the assets.
INTANGIBLE ASSETS: Intangible assets represent the excess of purchase price
over fair value of tangible net assets of acquired businesses. Intangible
assets, which include patents and intangibles not specifically identifiable,
are being amortized using the straight-line method over periods of up to
sixteen years.
INCOME TAXES: Effective January 1, 1993, the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 109, "Accounting for Income
Taxes", which requires the use of the liability method of accounting for
deferred income taxes. Under this method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax basis
of assets and liabilities and are measured using the enacted tax rates in
effect for the years in which the differences are expected to reverse. Prior to
the adoption of Statement 109, income tax expense was determined using the
deferred method. Deferred tax expense was based on items of income and expense
that were reported in different years in the financial statements and tax
Page 47
returns and were measured at the tax rate in effect in the year the
difference originated.
EARNINGS PER SHARE: Earnings per share is based upon the average number of
shares of common stock outstanding during each year. Shares subject to option
are not included in earnings per share computations because the present effect
thereof is not materially dilutive.
2. INVESTMENTS
Effective January 1, 1994, the Company adopted FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities, " for
investments held as of or acquired after that date. In accordance with the
Statement, prior period financial statements have not been restated to reflect
the change in accounting principle. The beginning balance of stockholders'
equity was increased by $1,180,000 (net of $751,000 in deferred income taxes)
to reflect the net unrealized holding gains on securities classified as
available-for-sale previously carried at cost.
The following is a summary of the Company's investments in marketable equity
and debt securities at December 31, 1994 (in thousands):
Gross
Unrealized Estimated
Cost Gains/(Losses) Fair Value
------- -------------- ----------
Debt securities $87,490 ($2,081) $85,409
Equity securities 7,700 (119) 7,581
------- ------- -------
$95,190 ($2,200) $92,990
======= ====== =======
3. INVENTORIES
Inventories are as follows (in thousands):
December 31
------------------
1994 1993
-------- -------
Finished goods $86,719 $45,338
Work-in-process 7,552 10,586
Raw material 28,784 28,455
-------- -------
FIFO cost 123,055 84,379
Less LIFO reserve 7,298 7,797
-------- -------
$115,757 $76,582
======== =======
4. BUSINESS ACQUISITIONS
In August 1994, the Company purchased 31% of the outstanding common stock of
Matsumoto Medical Instruments, Inc., Osaka, Japan, thereby increasing its
direct ownership interest in Matsumoto to 51%. Matsumoto is one of the largest
distributors of medical devices in Japan and is the exclusive distributor of
most Stryker products in that country. The cost of the 31% investment, which
was based on net book value, was approximately 6.0 billion Yen ($60.7
million). Payment of approximately 847 million Yen ($8.5 million) of the
purchase price has been deferred to April 1995. The acquisition was accounted
Page 48
for by the purchase method and the results of operations for Matsumoto were
consolidated with Stryker beginning in August 1994. If the acquisition had
occurred on January 1, 1993, pro forma net sales for the Company would have
been $762,341,000 for 1994 and $694,923,000 for 1993. Pro forma net earnings
would not have differed significantly from reported results.
In August 1993, the Company purchased 20% of the outstanding common stock of
Matsumoto. The cost of the investment, which was based on net book value, was
approximately 3.4 billion yen ($32.8 million). This initial investment was
accounted for under the equity method until August 1994, when the additional
31% interest was acquired. The Company's share of Matsumoto's net earnings
did not have a material impact on the Company's net earnings in 1993.
In June 1994, the Company purchased the Steri-Shield product line, which is a
personal protection system for operating room personnel. The acquisition was
accounted for by the purchase method at a total cost of $6,500,000, of which
$5,500,000 in royalties will be paid over the next seven years. Intangible
assets acquired, principally patents, are being amortized over seven to ten
years. Pro forma consolidated results including the purchased business would
not differ significantly from reported results.
During 1994, 1993 and 1992, the Company's subsidiary, Physiotherapy
Associates, Inc., purchased several physical therapy clinic operations. The
aggregate purchase price of these clinics in 1994, 1993 and 1992 was
approximately $7,600,000, $1,900,000 and $2,900,000, respectively.
Intangible assets acquired, principally employment contracts and goodwill,
are being amortized over periods ranging from one to fifteen years. Pro-
forma consolidated results including the purchased businesses would not
differ significantly from reported results.
In October 1992, the Company's subsidiary, Stryker France S.A., acquired Dimso
S.A. and its subsidiary companies in France and Spain. Dimso designs and
manufactures the Diapason and Stryker 2S Spinal Implant Systems and other
orthopaedic products. The acquisition was accounted for by the purchase
method at a total cost of $13,000,000, with approximately $7,000,000 to be paid
over the following three years. Intangible assets acquired, principally
patents, are being amortized over a ten year period. Pro forma consolidated
results including the purchased business would not differ significantly from
reported results.
5. BORROWINGS
The Company and its subsidiaries have unsecured short-term line of credit
arrangements with banks aggregating $20,000,000 domestically and $25,700,000
equivalent in foreign currencies. Borrowings under these lines at December
31, 1994 were $208,000 ($777,000 at December 31, 1993) in foreign funds at an
average interest rate of 12.8% (12.5% in 1993). These lines generally expire
on July 31, 1995.
Long-term debt is as follows (in thousands):
December 31
-----------------
1994 1993
------- -------
Bank loans $86,616 $30,736
Other 14,029 1,428
------- -------
100,645 32,164
Less current maturities 5,369 882
------- -------
$95,276 $31,282
======= =======
Page 49
The bank loans represent two separate borrowings made to finance the
acquisition of the Company's 51% interest in Matsumoto Medical Instruments,
Inc. (see Note 4). Both loans are Japanese Yen denominated, are unsecured and
mature in August 1998. The first loan is from the Chicago branch of The Sanwa
Bank, Limited, has a principal balance of $34,442,000 ($30,736,000 at
December 31, 1993) and bears interest at a fixed annual rate of 4.76%. The
second loan is a floating rate loan from the Chicago branches of The Bank of
Tokyo, Ltd., The Mitsubishi Bank Limited and The Sanwa Bank, Limited and has
a principal balance of $52,174,000. The Company has fixed the effective
annual interest rate of this debt at 4.17% using an interest rate swap with a
notional amount and term equal to that of the related loan.
Maturities of debt for the four years succeeding 1995 are: 1996 - $3,152,000;
1997 - $52,000; 1998 - $86,673,000 and 1999 - $5,070,000.
The carrying amounts of the Company's long-term debt and interest rate swap
approximate their fair values based on the Company's current borrowing rates
for similar types of borrowing agreements and quoted market rates,
respectively.
Total interest expense, which is included in other income and approximates
interest paid, was $3,677,000 in 1994, $1,067,000 in 1993 and $411,000 in
1992.
6. CAPITAL STOCK
The Company has key employee and director Stock Option Plans under which
options are granted at a price not less than fair market value at date of
grant.
The options are granted for periods of up to ten years and become exercisable
in varying installments. A summary of stock option activity follows:
Option
Shares Price Per Share
--------- ---------------
Options outstanding at January 1, 1993 1,275,925 $3.20 - $38.75
Granted 867,500 22.38 - 25.50
Canceled (411,300) 6.75 - 38.75
Exercised (75,600) 3.20 - 14.63
--------- --------------
Options outstanding at December 31, 1993 1,656,525 3.20 - 34.25
Granted 37,500 25.88 - 28.00
Canceled (58,000) 6.75 - 34.25
Exercised (88,040) 3.20 - 25.50
--------- --------------
Options outstanding at December 31, 1994 1,547,985 $3.20 - $34.25
========= ==============
At December 31, 1994, options for 750,085 shares were exercisable and
1,133,600 shares were reserved for future grants.
The Company has 500,000 authorized shares of $1 par value preferred stock,
none of which are outstanding.
7. RETIREMENT PLANS
Substantially all employees of the Company are covered by retirement plans.
The majority of employees are covered by profit sharing or defined
contribution retirement plans.
Page 50
The Company's 51% owned subsidiary, Matsumoto Medical Instruments, Inc., has
a noncontributory defined benefit plan covering all employees who are
generally entitled, upon termination, to lump-sum or annuity payments of
amounts determined by reference to the current level of salary, length of
service, and the conditions under which the termination occurs. Matsumoto's
funding policy for the plan is to contribute actuarially determined amounts
on a monthly basis. In addition, certain officers of Matsumoto are
customarily entitled to lump-sum payments under an unfunded retirement plan.
An accrual has been provided for the expected cost of these benefits earned
to date, although such payments are subject to the approval of Matsumoto's
stockholders. Amounts accrued for both Matsumoto retirement plans, which
provide for substantially all unfunded obligations under the plans, totaled
$16,235,000 at December 31, 1994 and are recorded as other noncurrent
liabilities in the consolidated balance sheet.
Retirement plan expense under all of the Company's retirement plans totaled
$6,753,000 in 1994, $5,302,000 in 1993 and $4,715,000 in 1992.
8. INCOME TAXES
Effective January 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes", which requires the use of the liability method
of accounting for income taxes (see Note 1). As permitted by Statement 109,
the Company has elected not to restate the financial statements of any prior
years. The cumulative effect of the change in the method of accounting on net
earnings was not material.
Earnings before income taxes and minority interest consist of the following
(in thousands):
1994 1993 1992
-------- ------- -------
United States operations $100,996 $88,181 $66,552
Foreign operations 26,579 7,884 10,388
-------- ------- -------
$127,575 $96,065 $76,940
======== ======= =======
The components of the provision for income taxes follow (in thousands):
1994 1993 1992
-------- ------- -------
Current:
Federal $31,932 $26,114 $20,827
State, including Puerto Rico 5,133 10,372 7,973
Foreign 17,523 2,291 4,611
------- ------- -------
54,588 38,777 33,411
Deferred tax expense (credit) (3,818) (2,917) (4,171)
------- ------- -------
$50,770 $35,860 $29,240
======= ======= =======
Page 51
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:
1994 1993 1992
----- ----- -----
U.S. statutory income tax rate 35.0% 35.0% 34.0%
Add (deduct):
State taxes, less effect of
federal deduction 2.3 6.3 5.9
Foreign income taxes at rates
different from the U.S.
statutory rate 5.4 (.8) 1.0
Tax benefit relating to operations
in Puerto Rico (2.0) (1.8) (1.9)
U.S. research and development tax
credit (.6) (1.4) (.9)
Earnings of Foreign Sales Corporation (1.4) (1.4) (.8)
Other 1.1 1.4 .7
----- ----- -----
39.8% 37.3% 38.0%
===== ===== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effect of
significant temporary differences which comprise the Company's deferred tax
assets and liabilities are as follows (in thousands):
December 31
-----------------
1994 1993
------- -------
Deferred tax assets:
Inventories $34,475 $4,712
Accounts receivable and other assets 2,048 2,874
Other accrued expenses 18,165 6,662
State taxes 3,127 1,297
Other 2,226 920
------- -------
Total deferred tax assets 60,041 16,465
Deferred tax liabilities:
Depreciation (1,681) (792)
Other (2,244) (895)
------- -------
Total deferred tax liabilities (3,925) (1,687)
------- -------
Total net deferred tax assets $56,116 $14,778
======= =======
Page 52
Deferred tax assets and liabilities are included in the consolidated balance
sheet as follows (in thousands):
December 31
-----------------
1994 1993
------- -------
Current assets -- Deferred income taxes $54,333 $15,829
Noncurrent assets -- Other assets 4,438
Noncurrent liabilities -- Other liabilities (2,655) (1,051)
------- -------
Net deferred tax assets $56,116 $14,778
======= =======
No provision has been made for U.S. federal and state income taxes or foreign
taxes that may result from future remittances of the undistributed earnings
($152,619,000 at December 31, 1994) of foreign subsidiaries because it is
expected that such earnings will be reinvested overseas indefinitely.
Determination of the amount of any unrecognized deferred income tax liability
on these unremitted earnings is not practicable.
Total income taxes paid were $51,898,000 in 1994, $27,641,000 in
1993 and $25,133,000 in 1992.
9. GEOGRAPHIC DATA
Geographic area information follows (in thousands):
1994 1993 1992
-------- -------- --------
NET SALES
United States operations:
Domestic $405,549 $378,255 $330,782
Export 117,669 115,977 81,513
Foreign operations:
Pacific 130,223 33,651 33,660
Europe 70,366 63,366 58,010
Other 12,094 11,987 9,522
Eliminations (53,981) (45,901) (36,433)
-------- -------- --------
Net Sales $681,920 $557,335 $477,054
======== ======== ========
OPERATING INCOME
United States operations $109,429 $90,726 $68,759
Foreign operations:
Pacific 12,560 1,465 4,264
Europe 6,554 6,571 6,998
Other 1,686 1,660 213
-------- ------- -------
Total foreign operations 20,800 9,696 11,475
Corporate expenses (9,753) (8,480) (6,533)
-------- ------- -------
Total Operating Income $120,476 $91,942 $73,701
======== ======= =======
Page 53
1994 1993 1992
-------- -------- --------
ASSETS
United States operations $248,883 $225,587 $199,188
Foreign operations:
Pacific 281,259 12,053 12,384
Europe 50,111 39,313 42,580
Other 9,801 4,067 2,741
Corporate 177,917 173,184 83,379
-------- -------- --------
Total Assets $767,971 $454,204 $340,272
======== ======== ========
Intercompany sales between geographic areas are included in export and foreign
operations sales at agreed upon prices which include a profit element.
For the year ended December 31, 1993, sales to Matsumoto Medical Instruments,
Inc. were $64,300,000 or 12% of total net sales. No customer accounted for
10%
or more of the Company's sales in 1994 or 1992.
Gains (losses) on foreign currency transactions, which are included in other
income, totaled $586,000, $(256,000) and $188,000 in 1994, 1993 and 1992,
respectively.
Corporate assets consist primarily of domestic cash and cash equivalents and
marketable securities and, in 1993, the investment in affiliate.
10. LEASES
The Company leases various manufacturing and office facilities and equipment
under operating leases. Future minimum lease commitments under these leases
are as follows (in thousands):
1995 $10,076
1996 8,320
1997 5,625
1998 3,605
1999 1,823
Thereafter 1,766
-------
$31,215
=======
Rent expense totaled $14,644,000 in 1994, $10,950,000 in 1993 and $8,792,000
in 1992.
11. CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
normal course of business. The Company does not anticipate material losses as
a result of these actions.
Page 54
SALES ANALYSIS, QUARTERLY DATA
(dollars in thousands, except per share data)
PRODUCT LINE SALES (Unaudited) 1994 1993 1992
-------------- -------------- --------------
SURGICAL
Orthopaedic Implants,
Endoscopic Systems,
Powered Surgical Instruments
and Other Operating Room
Devices $544,049 80% $447,042 80% $394,111 83%
MEDICAL
Patient Care and Patient
Handling Equipment and
Physical Therapy Services 137,871 20 110,293 20 82,943 17
-------- --- -------- --- -------- ---
$681,920 100% $557,335 100% $477,054 100%
======== === ======== === ======== ===
DOMESTIC/INTERNATIONAL SALES
(Unaudited) 1994 1993 1992
-------------- -------------- --------------
Domestic $405,549 59% $378,255 68% $330,782 69%
International 276,371 41 179,080 32 146,272 31
-------- --- -------- --- -------- ---
$681,920 100% $557,335 100% $477,054 100%
======== === ======== === ======== ===
Page 55
SUMMARY OF QUARTERLY DATA (Unaudited)
1994 Quarter Ended 1993 Quarter Ended
--------------------------------------- -----------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
(a)<F1> (b)<F2>
-------- -------- -------- -------- -------- -------- -------- --------
Net Sales $148,759 $154,226 $174,316 $204,619 $135,202 $140,012 $136,932 $145,189
Gross Profit 81,215 83,705 96,495 120,124 73,716 75,172 73,056 78,643
Earnings Before
Income Taxes and
Minority Interest 27,970 27,435 29,714 42,456 23,300 22,550 22,565 27,650
Net Earnings 17,340 17,010 16,730 21,320 14,450 14,000 13,990 17,765
Net Earnings Per
Share of Common
Stock .36 .35 .35 .44 .30 .29 .29 .37
Market Price of
Common Stock:
High 35-1/2 30-3/4 37-1/2 37-1/2 39-3/4 29-1/2 29-3/4 29-1/2
Low 26 23-3/4 27-1/4 32-3/4 22-1/4 21 24-1/2 23-1/4
The price quotations reported above were supplied by the National Association
of Securities Dealers.
<FN>
<F1>(a) In the third quarter of 1994, the consolidation of Matsumoto Medical
Instruments, Inc., which was consolidated beginning in August 1994 (see
Note 4 to consolidated financial statements), resulted in incremental net
sales of $25,000,000. The incremental impact on net earnings was not
material.
<F2>(b) In the fourth quarter of 1994, the consolidation of Matsumoto
resulted in incremental net sales of $40,200,000 and incremental net
earnings of $1,900,000 ($.04 per share).
</FN>
Page 56
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Stryker Corporation
We have audited the accompanying consolidated balance sheet of Stryker
Corporation and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Stryker
Corporation and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Ernst & Young LLP
Kalamazoo, Michigan
January 31, 1995